Bank shareholders disappointed by poor dividend returns in recent years are set for further anguish, according to a report from Oliver Wyman, which says any excess cash should be spent on upgrading technology in order to compete with fintech disruptors.

Many banks are struggling to make a return on equity above cost and to pay dividends, and now the consultant Oliver Wyman reckons that they will have to suspend their dividends entirely to invest in new technology – or lose significant parts of their business to fintech competitors.

To make matters worse for bank shareholders, according to the consultancy the winners from the new financial services industry will be consumers not investors. A new report from Oliver Wyman called Modular Financial Services: The New Shape of the Industry says that "new technology is making it easier for customers to buy from multiple product providers. The number of financial products used by the average customer is increasing. We call this modular demand. This trend is driven by digital platforms that give customers supplier choice as well as regulatory changes allowing third parties to access bank data."

Given the huge amounts spent by the banks on IT it might be thought that they were already retooled for the changes happening throughout the market, but apparently they are not. The report says that costly, inflexible legacy infrastructure will be unsustainable in a modular industry. Banks will need to overhaul their back offices and in doing so may require suspending dividends for a year of more.

Banks will be able to develop new services to capture business but the new platforms are set to take away $50 to $150bn of revenues, or between 1% to 2% of the total market, according to the report. Consumers will gain $150bn to $300bn of value by way of lower prices in a more competitive market.

Brian Caplen is the editor of The Banker.

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